Bernanke bump: Stocks tend to rally on testimony

Stocks have received average 0.5% boost after testimony recently

SAN FRANCISCO (MarketWatch) — Expect stocks to finish higher after Federal Reserve Chairman Ben Bernanke gives his semiannual testimony to Congress on Tuesday and Wednesday, if history serves as any guide.

Over the past six years, the S&P 500 Index
SPX, -0.45%
has finished higher nine out of 12 times during the two-day period over which the Fed chair has answered questions from Congress. By the close of the second day’s testimony, from the close before the first day, the stock index has gained an average 0.5%, a MarketWatch analysis of FactSet data shows. Read more about hawks vs. doves at the Fed going into next week.

S&P 500 before and after
S&P 500 during Bernanke’s semiannual
monetary policy report to Congress

testimony dates

2 day S&p 500 change

S&P close before

s&P close after

Feb 14-15, 2007

+0.87%

1,444.26

1,456.81

July 18-19, 2007

+0.24%

1,549.37

1,553.08

Feb 27-28, 2008

-0.99%

1,381.29

1,367.68

July 15-16, 2008

+1.39%

1,228.3

1,245.36

Feb 24-25, 2009

+2.94%

743.33

764.9

July 21-22, 2009

+0.30%

951.13

954.07

Feb 24-25, 2010

+0.76%

1,094.6

1,102.94

July 21-22,
2010

+0.94%

1,083.48

1,093.67

March 1-2, 2011

-1.42%

1,327.22

1,308.44

July 13-14, 2011

-0.36%

1,313.64

1,308.87

Feb 29-March 1, 2012

+0.14%

1,372.18

1,374.09

July 17-18, 2012

+1.41%

1,353.64

1,372.78

Source: FactSet

Since 2007, the biggest bump to markets during Bernanke’s testimony was Feb. 24-25, 2009, when the S&P 500 rose nearly 3% over the course of the two-day meeting. Then again, the index was dragging its knuckles in the 700s at the time, compared to more than 1500-level as of Friday’s close. The Fed had just cut interest rates to their current near-zero levels that past December, and the first round of quantitative easing measures had started in November. Read more on Bernanke's Feb. 2009 testimony.

The biggest two-day drop, 1.4%, came after the March 1-2, 2011, talk, after Bernanke warned that a violation of the country’s debt ceiling would likely create a new financial crisis and House Republicans criticized QE2. Read more about Bernanke's March 2011 testimony.

On Tuesday and Wednesday, Bernanke will have to bridge divisions within the Fed in his testimony before Congress. Infighting between hawks and doves spilled out in Federal Open Market Committee meeting released this past Wednesday. That helped drive the S&P 500 down nearly 2% over two days. Read more about Wednesday's FOMC minutes.

That pull on the S&P 500 contributed to the index’s first losing week of 2013 with a 0.3% decline. The Nasdaq Composite Index
COMP, -0.56%
also had its worst week of the year, closing down 1%. Read more on U.S. stocks.

For some strategists, that sort of divisiveness is not likely to deter Bernanke from maintaining the present course of easing measures.

“Over the last couple of years, public division in the Fed has leaked outside, and that leads people to assume certain things,” said Dan Greenhaus, chief global strategist at BTIG. With that in mind, it’s up to the Fed Chairman to bridge the gap.

While division within the Fed may go deeper, and be more public than before, Greenhaus said the core of the Fed — Bernanke, Vice Chair Janet Yellen, and New York Fed President William Dudley — still favors additional easing and Bernanke’s likely to repeat that. Read more on what Fed speakers have been saying.

On the other hand, markets may be better served if the Fed signals a willingness to pursue a less aggressive monetary policy, said Brian Belski, chief investment strategist at BMO Capital Markets.

A scaling back of QE measures and higher interest rates, however, may be troublesome for the market in the short-term as investor culture has become firmly rooted in a reactionary “fire-aim-ready” mindset, he said.

“We in the world of investing have now reared an entire generation of investors that firmly believe that stocks need monetary policy to go up,” said Belski.

More aggressive Fed actions have certainly gone hand in hand with a massive rebound in stocks.

The Federal Reserve first announced what would come to be known as the first round of extraordinary stimulus measures, or quantitative easing, on Nov. 25, 2008. Following those bond-buying measures, plus the subsequent QE2 and QE3 programs and measures like Operation Twist, the S&P 500 has risen nearly 664 points, or 78%, to Friday’s close of 1,515.60. In comparison, the S&P 500 had fallen 713 points, or about 46%, from its high of 1,565.15 on Oct. 9, 2007, until the first announcement of QE.

While Belski expects Bernanke to not say anything definitive to Congress, he does expect he will signal it’s okay to take the foot off the monetary policy accelerator because the economy is in better shape and that rising interest rates will be a good thing.

“The fundamental approach is interest rates will ultimately go up because of stability and strength of the economy,” he said. “When the economy goes up, it’ll be good for stock prices. Rising interest rates can be a good thing, and not a cycle buster, and stocks will benefit from them.”

In his testimony before Congress, Bernanke needs “to be very simple and clear because he doesn’t want to create an overreaction [in markets].”

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